RAM Ratings: Malaysian banks able to withstand challenges

Will Maybank follow suit to raise its base rates?

KUALA LUMPUR: RAM Ratings has reiterated its “stable outlook” on the Malaysian banking sector. 

In a statement on Monday, the ratings agency said its expects most banks to be able to navigate through the more challenging economic landscape with sound credit metrics. 

“Our view is underscored by our detailed reviews of close to 50 Malaysian banks and non-bank financial institutions in our rating universe in the past year,” it said. 

Its key expectations for 2016 include asset quality remaining healthy despite some expected slippage, sturdy capital buffers, liquidity remaining healthy albeit with tighter funding conditions, loan growth easing to 6%, and some softening in projected earnings.

In line with its revised GDP growth forecast of 4.4% for 2016, it expects the banking sector’s loan growth to ease to 6% after the 7.9% expansion in 2015. 

“We envisage the system’s gross impaired-loan (GIL) ratio to come in at 2% at the end of this year, which is considered still healthy although higher than the current historical low of 1.6%,” Co-Head of Financial Institution Ratings Sophia Lee said.

The projected uptick in GILs is also expected to be broad–based.

High levels of household debt is still a concern, especially for the low-income group amid an environment of rising job cuts and higher cost of living.

Although RAM expects some weakening in the credit quality of household financing, this should not be significant given still-accommodative interest rates. As at end-January 2016, the household sector’s GIL ratio remained low at 1.1%. 

Banks have generally maintained prudent underwriting standards for this sector.

Meanwhile, it expects corporate borrowers in certain segments such as construction, oil and gas, wholesale and retail trade, automotive and non-residential property, to face greater earnings pressure if the weak market conditions persist. 

“Based on our stress tests, however, the credit deterioration in business loans as anticipated to be manageable as the overall leverage and financial indicators of businesses have stayed fairly healthy,” it said. 

Lee said that the banking system’s liquidity position has kept healthy, as underlined by its Basel III liquidity coverage ratio of 125% as at end-January 2016. However, larger capital outflows in the second half of 2015 have tightened funding conditions. 

As at the same date, the system’s loans-to-deposits ratio had crept up to 87.1%. 

Moving forward, RAM believes that competition for deposits will remain rife as banks emphasise stronger liquidity buffers amid the uncertain economic environment.

Given the expectation of slower loan growth and a potential increase in credit costs, banks’ earnings are projected to soften this year. Nonetheless, the Malaysian banking system is still well capitalised, with a common-equity tier-1 capital ratio of 13% as at end-January 2016, it said. 

At the same time, the tier-1 and total capital ratios of the system remained favourable at a respective 13.9% and 16.6%.